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Contrarian investors currently have an opportunity to pick up some top Canadian dividend stocks at discounted prices for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividend growth.
Enbridge
Enbridge (TSX:ENB) trades near $47 per share compared to a 12-month peak of $54. The stock rose as high as $59 in the middle of 2022 before aggressive interest rate hikes at the Bank of Canada and the U.S. Federal Reserve sent the share prices of utilities, pipelines, and telecoms into an extended pullback.
Inflation topped 8% in Canada and 9% in the U.S. in June 2022. In order to get price increases under control, the central banks need to cool off the economy and bring balance to the jobs market. Rate hikes force households to spend more money on mortgage costs and other loans, cutting into the amount of cash they have available to splurge on discretionary items and services. As demand drops, businesses hire fewer people or even start to trim staff. The eventual result should be a slowdown in price hikes.
Inflation for January came in at 2.9% in Canada and 3.1% south of the border. Progress is being made toward the 2% target, so there is a good chance the next move by the central banks will be to the downside as they try to avoid pushing the economy into a deep recession. As such, the worst of the pressures on Enbridge from rate hikes should be in the rearview mirror.
Enbridge met its financial guidance for 2023 and expects to deliver growth in distributable cash flow (DCF) in 2024, supported by new assets put in service as part of the ongoing capital program and contributions from acquisitions.
Enbridge raised the dividend by 3.1% for 2024. This is the 29th consecutive annual dividend increase. Investors who buy the stock at the current level can get a 7.8% dividend yield.
Fortis
Fortis (TSX:FTS) operates $66 billion in utility assets in Canada, the United States, and the Caribbean. The businesses include power-generation facilities, natural gas distribution utilities, and electric transmission networks. These are rate-regulated operations providing essential services, so revenue and cash flow tend to be reliable and predictable.
Fortis grows through a combination of acquisitions and internal development projects. The current $25 billion capital program is expected to boost the rate base from about $37 billion in 2023 to more than $49 billion in 2028. The resulting increase in revenue and cash flow should support planned annual dividend increases of 4-6% over that timeframe.
Fortis increased the dividend in each of the past 50 years, so investors should feel comfortable with the dividend-growth guidance. The stock trades near $53.50 at the time of writing compared to the 12-month high of $62. Investors can now get a 4.4% dividend yield.
The bottom line on top TSX dividend stocks
Enbridge and Fortis pay attractive dividends that should continue to grow. These stocks look undervalued today and could surge as soon as the central banks begin to cut interest rates. If you have some cash to put to work in a TFSA or RRSP, Enbridge and Fortis deserve to be on your radar.
